NEW DELHI, July 10 India's new government on
Thursday unveiled a first budget that seeks to revive growth and
curb borrowing, but left open questions on how it will reduce
the fiscal deficit and restore investor confidence.

Expectations had been high that Prime Minister Narendra Modi
would use India's strongest election mandate in 30 years to take
radical steps comparable to the 1991 market reforms that
unleashed an era of high economic growth.

After two weak years, the government announced steps to
boost capital spending in Asia's third-largest economy and
reassure foreign investors that they will get fair treatment.

Yet Finance Minister Arun Jaitley stopped short of halting
retroactive tax claims against foreign investors. Britain's
Vodafone said in response it will pursue its fight
against a years-old $2.2 billion charge.

"We shall leave no stone unturned in creating a vibrant and
strong India," Jaitley said, promising to raise the pace of
economic growth to 7-8 percent in three to four years from less
than 5 percent now.

Jaitley, 61, told lawmakers he would uphold the "daunting"
fiscal deficit target for this year inherited from the last
government - 4.1 percent of gross domestic product - but
admitted that this would be a challenge.

"The intent appears to be there, but the measures have not
been really thought through," Atsi Sheth, Moody's sovereign
credit analyst for India, told Reuters.

Standard & Poor's, which has long warned India that it may
lose its investment grade rating unless the government works
harder to balance its finances, said the budget did not change
its assessment.

"I have no authority to rate ratings agencies, but I'll only
tell them to be a little more realistic," Jaitley said, in
reference to criticism that his "cautious" budget did not do
enough to reduce subsidies.

Jaitley announced an 8 percent rise in spending, roughly
unchanged after taking inflation into account. The government
will also seek to raise a record $10.5 billion from asset sales
- four times what the previous government collected from
privatisation moves in the fiscal year that ended in March 2014.

Among the asset sales would be some holdings in state-run
banks, Jaitley said, but he added the government would keep
majority ownership.

In his two-and-a-quarter hour address, Jaitley raised the
minimum income level at which people start paying tax and hiked
levies on cigarettes and soft drinks.

INVESTOR FRIENDLY?

Jaitley announced he would raise ceilings on foreign
investment in the defence and insurance sectors and loosen rules
for foreign e-commerce retailers and real estate investors, but
still bar non-residents from taking majority control in projects
to supply the world's largest arms buyer.

Limits on foreign investment in defence and insurance
ventures will go up to 49 percent from 26 percent - less than
sought by defence contractors to justify sharing technology when
they locate operations in India.

In another signature initiative, he said the government will
approve a sales tax reform this year to unify India's federal
states into a common market, boosting revenue and making it
easier to do business.

Investors had piled into Indian stocks on hopes that Modi's
leadership and mandate would break a logjam thwarting reforms
during the 10-year tenure of his predecessor, Manmohan Singh,
whose coalition government became increasingly divided.

However, the specific measures announced by Jaitley fell
short of bullish expectations and Indian stocks, bonds and the
currency gave back gains late in the day as doubts about
the budget arithmetic emerged.

Andrew Colquhoun, head of the Asia-Pacific Sovereigns Group
at Fitch Ratings, said he was "currently unsure how this (fiscal
deficit target) can be met without further revenue-strengthening
or expenditure-saving measures". Both Moody's and Fitch rate
India on the bottom rung of investment grade.

'BITTER MEDICINE'

Modi, 63, won election in May with a pledge to create jobs
for the 1 million people who enter India's workforce every
month. Since taking office, he has warned that Indians should
expect "bitter medicine".

Jaitley said he would cut the fiscal deficit to 3.6 percent
by 2015/16 and 3 percent the year after.

He found room in the budget for projects to upgrade India's
food distribution infrastructure, raised subsidies on
fertilisers and left diesel subsidies untouched - measures to
aid farmers who face poor monsoon rains this year.

Jaitley sought to reassure investors by promising a stable
tax regime and saying the government would not "ordinarily"
create new liabilities retrospectively, but said several cases
in the court will be pursued.

Vodafone and India have been locked in a standoff since the
company acquired Hutchison Whampoa's Indian mobile
assets in 2007.

India's Supreme Court dismissed the demand in 2012, but the
government at the time responded by announcing retrospective
legislation to change the rules.

The British firm said it will "continue the process of
international arbitration".
($1 = 60 rupees)
(Additional reporting by Kate Holton in London, and the New
Delhi and Mumbai newsrooms; Writing by Douglas Busvine and Frank
Jack Daniel; Editing by Richard Borsuk and Ruth Pitchford)

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